RZB: First ever analysis on Russian utilities & Russian Oil and Gas Sector

RZB\'s first edition of the Russian Networks Sector Report (http://www.rzbfiles.at/russiannetworks.pdf) as well as the latest issue of the Russian Oil & Gas Sector Report (http://www.rzbfiles.at/russianoilandgas.pdf) preprared for download. The Russian Network Sector Report is remarkable, because never before have Western analysts taken a closer look at the Russian utilities sector and it shows opportunities to invest in the Russian regions.


A. Inside Russian Networks Sector Report


Key market drivers for Russian distributors and ttransmission companies:

Utilities reform in Russia started a few years ago with major changes coming into play only last year. Every quarter there are new companies introduced , more structures reviewed and more ideas on the agenda. Keeping in mind the Moscow blackout in May 2005, Russian authorities have increased thier efforts for infrastructure reform to avoid contrywide blackouts. Recent decissions only increase our belief that the time slot for investing in Russian utilities cheaply is closing. Once regulation is finally introduced, shares are likely to appreciate quickly.
Transmission companies are controlled by the Federal Grid Company (FSK) which is planning a massive capital expenditure programm for the next four years to be financed partially by sales of Russian generating companies and partially via direct capital injections that will diminish value for transmission companies which will be further merged into FSK.
The reform plan of the Russian electricity monopoly Unified Energy Systems (UES) envisages the privatisation of distribution companies. Due to their capex needs - which connot be covered even with the implementaion of connection charges - RZB\'s analysts expect distributors to switch to a regulated asset base (RAB) scheme. Although there are high conversion risks and uncertainties regarding the exact mechanism and date of RAB implementation, still most of the companies will benefit. The new regulation will provide companies with an incentive to cut operational costs and network losses. Therefore marginally profitable companies will benefit more than loss-makers.
RZB\'s analysts base their recommendations for distribution companies on the two-stage DCF model with the implementation of a tariff in 2006-2008 and RAB introduction in the second part of the planning horizon, \"buy\" recommendations include:

RZB\'s buy recommendations:

Chelyabenergo, target price: 0,130 US-$
Kurskenergo, target price: 0,128 US-$
Moscow City Distribution, target price: 0,100 US-$
Rostovenergo: 0,114 US-$
Smolenskenergo: 0,584 US-$
Tomsk Distribution Company: 0,040 US-$
Volgogradenergo: 1,151 US-$


B. Inside Russian Oil & Gas Report:

RZB\'s analysts believe that once external factors stabilize and market sentiment becomes more positive, the inherent, fundamental qualities of Russian oil companies will again shine through. Moreover, even leaving aside the stocks\'s absolute upside RZB\'s analysts believe that Russian oil companies should become increasingly attractive to global energy investors due to favourable comparisons with their international peers or their outstanding positions. They are optimistic about the sector\'s prospects as a whole - over both the mid- and long.term - although, their preference would be for short term stocks that have dricers that diverge, at least partially, from the oil price. Gas producers and crude transparation are both relatively immune to a crude downturn. A planned change in Russia\'s oil tax system to specify a different mineral extraction tax rate for depleted fields and for new fields, should finally help achieve the state\'s priorities of intensifying crude and refining output.

RZB\'s buy-recommendations:

Gazprom, target price: 13,7 US-$
Lukoil, target price: 99,2 US-$
Rosneft, target price: 9,0 US-$


Kind regards,

Wilfried Peter Stöckl

Public Relations
Raiffeisen Zentralbank Österreich AG
Am Stadtpark 9, A-1030 Wien

Tel.: +43 1 71707-1959
Fax: +43 1 71707-761959
Mail: [email protected]
www.rzb.at